Which is the best financial sector stock to buy as we head for Brexit and the wider world? Here are three of my favourites.
Taxpayers’ bank
Lloyds Banking Group (LSE: LLOY) has presented a dilemma for some time. On fundamentals it looks cheap, with forecasts suggesting P/E multiples of under 10 for this year and next.
On top of that, since the dividend was reinstated in 2014 it’s been storming back. For 2016 the ordinary dividend was hiked by 13% to 2.55p per share, for a yield of better than 4%, and a special dividend of 0.5p per share was added. Forecasts would see it climbing to 5.3% this year and 6.3% next, cover looks reasonable, and in February the bank reiterated its “progressive and sustainable ordinary dividend policy“.
Why, at 68p, is the share price stubbornly staying so low? Part of it must be the uncertainty facing the UK’s banking sector as we hurtle towards Brexit with no guarantee of any deal being done yet. And with economic growth forecasts slowing, many will feel that Lloyds’ optimistic forecasts for 2017 could be cut back too.
Lloyds was also one of the big baddies over the PPI scandal, and that’s not over by some way yet.
My thought is that Lloyds’ restructured position as “a simple, low risk, UK-focused bank” should see it safely through Brexit, and I still rate the shares as a long-term bargain.
Reshaped insurer
Aviva (LSE: AV) shares slumped after the EU referendum result, but they’ve recovered strongly since then, and at 533p they now stand 54% up on their low of June last year.
Aviva looks to me to be a very different prospect now. The biggest mistake was getting overstretched, and that led to the dividend being slashed to just 15p in 2013 and to a few years of weak earnings.
But 2016 results released this month showed operating profits rising by 12% and liquidity measures looking very strong again, leading chief executive Mark Wilson to speak of “more operating profit, more capital, more cash, more dividend,” adding “and there is more to come“.
Forecasts for a big EPS rise for 2017 would drop the P/E to 10.6 (and further to 9.9 in 2018), with the dividend looking set to yield 4.9% and 5.3% this year and next. And with the quality of management running the operation now, I envisage a profitable decade ahead.
Challenging newcomer
My final pick is one of the so-called challenger banks, the smaller fish that have emerged to exploit the space in the ponds previously filled by the big boys, and it’s OneSavings Bank (LSE: OSB).
It only floated in June 2014, and already its share price is up by 146% to today’s 418p. But even after that, its shares are valued at only around the same levels as its downtrodden rivals — and OneSavings doesn’t have their legacy problems which will still take some time to unravel.
The 20% rise in underlying earnings per share reported for 2016 can’t keep going at that pace for long, but even the slower rises of 6% and 7% forecast for this year and next would drop the P/E to under nine by 2018, while the dividend looks set to rise to 3.9%.
Chief executive Andy Golding said the bank is “well placed to take advantage of opportunities in our core businesses in 2017“.
I own Lloyds and Aviva shares, and I’d buy OneSavings Bank too.
